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2011 LCCI Cost Accounting Level 3 Series 4 (3017) PDF
2011 LCCI Cost Accounting Level 3 Series 4 (3017) PDF
Cost Accounting
Level 3
Model Answers
Series 4 2011 (3017)
Model Answers have been developed by EDI to offer additional information and guidance to Centres,
teachers and candidates as they prepare for LCCI International Qualifications. The contents of this
booklet are divided into 3 elements:
(2) Model Answers – summary of the main points that the Chief Examiner expected to
see in the answers to each question in the examination paper,
plus a fully worked example or sample answer (where applicable)
Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success.
EDI provides Model Answers to help candidates gain a general understanding of the standard
required. The general standard of model answers is one that would achieve a Distinction grade. EDI
accepts that candidates may offer other answers that could be equally valid.
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without prior written permission of the Publisher. The book may not be lent, resold, hired out or
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3017/4/11/MA Page 1 of 15
QUESTION 1
Cut Price Woods manufactures fence posts from second hand timbers. Firewood is generated as a
by-product from the process.
Customers’ requirements for the next two periods are 6,800 and 5.200 fence posts respectively.
The following information is available:
Manufacturing
Stock Holding
(6) A stock of finished fence posts will be maintained, at the end of each period, at 25% of the
estimated sales for the following period
(7) Second-hand timbers are ordered in quantities of 1,200 units at a reorder level of 400 units
Delivery is expected the next day
(8) Stock levels at the start of first period:
Second-hand timbers 400 units
Finished fence posts 1,700 units.
Costs
REQUIRED
Calculate:
(a) The total number of second-hand timbers required for manufacturing the customers’
requirements for the first period.
(4 marks)
(b) The stock value (£’s) at the end of the first period for both:
(c) The revenue, from the sale of firewood in the first period, if all rejected
units are sold.
(2 marks)
(Total 20 marks)
3017/4/11/MA Page 2 of 15
MODEL ANSWER FOR QUESTION 1
Syllabus topic 1: Materials and stock control (1.1)
£'s
Timber value of closing stock (£4 x 800) 3,200
Delivery cost (£600/1,200 x 800) 400 1 OF
3,600 1 OF
(c) Income from sale of rejected timber (£0.50 x 2,000 x 0.2 x 4) £800 2 OF
(2 marks)
(Total 20 marks)
3017/4/11/MA Page 3 of 15
QUESTION 2
Comfort Travel Ltd is a transport company operating six passenger vehicles. The business, located in
rented premises, operates Type L and Type M vehicles and employs drivers contracted from an agency
on the basis of individual jobs.
At present the company uses a traditional absorption costing system based on costs per vehicle/km. to
establish the costs of operation. Budgeted operational data for the next period, for each vehicle type, is
as follows:
Type L Type M
Agency driver costs (£) 20,000 6,000
Number of travelling passengers 8,400 1,600
Km per vehicle 16,000 12,000
Budgeted operational overheads for the period, not including agency driver costs, are £44,000 absorbed
on a rate per kilometre.
Further investigation has revealed the following activities and related operational overhead costs:
Other information
(i) Vehicle servicing is carried out regularly based on a predetermined number of kilometres
completed
(ii) Fuel costs are influenced by the number of kilometres completed
(iii) Cleaning costs are influenced by the number of seats on the vehicles
(iv) Vehicle insurance and depreciation are influenced by the purchase price of the vehicles.
(v) Road fund licence costs are influenced by the number of vehicles in operation.
(vi) Administration costs are influenced by the number of travelling passengers
(vii) Rent is influenced by the number of parking bays required. Each vehicle L requires two bays for
parking whereas each vehicle M only requires one.
REQUIRED
Calculate the budgeted average operational cost per vehicle for the period, for each type of vehicle,
using:
(Total 20 marks)
3017/4/11/MA Page 4 of 15
MODEL ANSWER FOR QUESTION 2
Syllabus Topic 2: Costing methods and systems (2.1 and 2.2)
(a)
Traditional absorption costing
Overhead absorption rate
Vehicle Type L M Total
No of vehicles 4 2
Km per vehicle 16,000 12,000
Total Km 64,000 24,000 88,000 1
Overhead absorption rate (£44,000/88,000) = £0.5 per km 1
(b)
Activity Based Costing
Activity Driver Vehicle L Vehicle M
£ £
Fuel £0.25 per Km 4,000 (0.25 x 16,000) 3,000 (0.25 x 12,000) 1½
(22,000/88,000)
Insurance £0.008 per £ purchase price 640 (0.008 x 80,000) 128 (0.008 x 16,000) 1½
(2,816/352,000)
Cleaning £8.00 per seat 360 (8.00 x 45) 96 (8.00 x 12) 1½
(1,632/204)
Servicing £0.04 per Km 640 (0.04 x 16,000) 480 (0.04 x 12,000) 1½
(3,520/88,000)
Licence £200 per vehicle 200 (200 x 1) 200 (200 x 1) 1½
(1,200/6)
Depreciation £0.016 per purchase price 1,280 (0.016 x 80,000) 256 (0.016 x 16,000) 1½
(5,632/352,000)
Administration £0.54 per passenger 1,134 (0.54 x 8400/4) 432 (0.54 x1600/2) 1½
(5,400/10,000)
Rent £180 per parking bay 360 (180 x 2) 180 (180 x 1) 1½
(1,800/10)
Total Overheads 8,614 4,772
3017/4/11/MA Page 5 of 15
MODEL ANSWER FOR QUESTION 2 CONTINUED
(15 marks)
(Total 20 marks)
3017/4/11/MA Page 6 of 15
QUESTION 3
Makit Ltd, which produces a single component for the motor industry, has just completed its first year of
trading. The summary profit and loss account for the year is set out below:
£ £
Sales (20,000 units) 1,280,000
Direct Costs
Direct material 360,000
Direct labour 320,000
Direct expenses 80,000
Overheads
Production 200,000
Administration 160,000
Selling 181,000 1,301,000
Net Loss 21,000
REQUIRED
The company has set a profit objective of £24,000 for year 2. Two suggestions have been made as to
how this profit could be achieved.
Suggestion1:
Reduce the selling price by £3 per unit and use a less expensive material that
would reduce the direct material cost by £2 per unit
Suggestion 2:
Increase the selling price by £4 and increase advertising expenditure by £75,000
In addition the use a less expensive material that would reduce the material cost by
£2 per unit.
All other fixed costs and unit variable costs will remain unchanged for year 2.
REQUIRED
(d) For each suggestion, calculate how many units need to be sold to achieve the profit
objective of £24,000.
(9 marks)
(Total 20 marks)
3017/4/11/MA Page 7 of 15
MODEL ANSWER FOR QUESTION 3
Syllabus Topic 3: Cost-volume-profit analysis (3.2) and (3.4)
3017/4/11 Page 8 of 15
MODEL ANSWER FOR QUESTION 3 CONTINUED
(Total 20 marks)
3017/4/11 Page 9 of 15
QUESTION 4
Sole Products Ltd manufactures and sells a single product. Due to a fall in sales demand the company
has been operating some way below maximum capacity. The company has prepared the following
report, for the year just ending, which indicates that demand is now increasing. Management of the
company, however, is concerned that the report also indicates a large adverse cost variance.
(i) production overheads are £33,000 at the maximum annual capacity of 14,000 units
(ii) selling and distribution costs include a fixed element of £6,000
(iii) administration costs are fixed.
REQUIRED
(a) Briefly explain the main differences between a flexible and a fixed budget.
(4 marks)
(b) Prepare a revised report for the year just ended, in the above format, using a flexed
budget.
(12 marks)
(c) State two possible reasons for each of the direct materials and direct labour costs
variances.
(4 marks)
(Total 20 marks)
3017/4/11 Page 10 of 15
MODEL ANSWER FOR QUESTION 4
Syllabus Topic 4: Budgetary planning and control (4.6), (4.8) and (4.9)
Flexible Budget
A flexible budget is used for control purposes.
It changes in response to changes in activity by recognising different cost
behaviour patterns.
2
(4 marks)
3017/4/11 Page 11 of 15
MODEL ANSWER FOR QUESTION 4 CONTINUED
(Total 20 marks)
3017/4/11 Page 12 of 15
QUESTION 5
Mix and Match Ltd uses a batch production method to produce its single product by combining two
materials Tee and Pee. The company has budgeted for a material mix ratio of 80:20 for Tee and Pee
respectively.
The standard production specification states that a 90% yield of product is expected.
Output 1,890 kg
Material Tee 1,140 kg £1,610
Material Pee 860 kg £2,780
REQUIRED
(c) Calculate the total material usage variance and reconcile this with the appropriate
variances calculated in part (a).
(4 marks)
(Total 20 marks)
3017/4/11 Page 13 of 15
MODEL ANSWER FOR QUESTION 5
Syllabus Topic 5: Standard costing and variance (5.4) and (5.6)
(Actual input quantity – budgeted material input. Quantity for output produced)
x Standard weighted average cost per unit of material input.
[(1140 + 860) - (1,890/0.9) x] 1.8 180 F 4
(4 marks)
Alternative solution for (iii)
(Actual output - budgeted output for the actual material input) x standard
weighted average cost per unit of output
{1,890 - [(1,140 +860) x 0.9]} x 2 180 F
Workings:
Standard cost of mix
Tee (200x 0.8) kg x £1.50 £240
Pee (200 x 0.2)kg x £3 £120
£360
Standard weighted average cost (material input)
£360/200 £1.80 per kg
Standard weighted average cost (material output)
£360/(0.9 x 200) £2.0 per kg
3017/4/11 Page 14 of 15
MODEL ANSWER FOR QUESTION 5 CONTINUED
(b) (i) Material mix variances occur where substitutes within the mix of materials input
are possible and when the materials are not mixed in standard proportions. It is a
measure of whether the mix is cheaper or more expensive than the standard mix
(at standard prices). 2
(ii) A Yield variance arises where there is a difference between what the input should
have been for the output achieved and the actual input.
Or
The difference between the output achieved and what should have been achieved
with the material used. 2
(4 marks)
(Total 20 marks)